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Knight Capital Debacle a Serious Warning Signal: Pros

Again, unusual and volatile trading has triggered a ripple that’s cut a swatch across a range of stocks and it calls the reliability of technology into question.

In a statement, market maker Knight Capital said a "technology issue" affected the routing of about 150 stocks listed on the New York Stock Exchange.

Although the events are complex, the pros say what you need to know is that there was a problem with Knight Capital software and the way it interacted with the NYSE.

And the pros say unless something is done, it will only be a matter of time before similar events happen, again. And the next time could be worse – far worse. At some point unexpected hiccups in technology could send the Street into spiral that will be almost impossible to stop.

“Hundreds of these systems interact all around the country – that’s the modern market making system,” explains trader Joe Terranova, , chief market strategist for Virtus. “And we’re learning it doesn’t always work.”

That's scary.

Henry Blodgett, of Business Insider, says Wall Street needs to wake up.
“Trading relies on technology. When you have a big technical error – it’s a warning.”

A serious warning.

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According to CNBC sources, at least 9 stocks in the Dow experienced unusual activity in the wake of Knight's “technology issue.” They were Alcoa , American Express , BofA, Caterpillar, DuPont, Pfizer, AT&T, GE and Verizon. (At the time of writing it had yet to be determined if the correlation was direct or indirect.)

“I’m surprised there wasn’t a backup technology to prevent this from happening,” adds trader Stephen Weiss, managing partner at Short Hills Capital.

On a positive note, the traders say the good news is that it wasn’t worse. "Humans on the floor of the NYSE – the market makers – were able to intervene and halt stocks. That prevented wider problems from happening," explains Weiss.

“We need to re-populate the floors of the exchanges,” says Terranova. “We need more people. We need to get away from completely electronic platforms.”

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Posted by CNBC's Lee Brodie

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Trader disclosure: On August 1, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Steve Weiss is long VZ; Steve Weiss is long T; Steve Weiss is long JPM; Steve Weiss is long WLP; Steve Weiss is long DGX; Steve Weiss is short JCP; Steve Weiss is short X; Joe Terranova is long SEPT. MINI S&P FUTURES; Joe Terranova is long VRTS; Joe Terranova is long MCD; Joe Terranova is long USB; Joe Terranova is long GS; Joe Terranova is long WFM; Joe Terranova is long JPM; Joe Terranova is long YHOO; Joe Terranova is long SBUX; Joe Terranova is long AAPL; Joe Terranova is long EMC; Joe Terranova is long NXPI; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTU

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